State Public Pension Gap: Shrinking But Still Huge

By Michael Aneiro

In case you missed it this weekend, the top story in Saturday’s Wall Street Journal – called Pension Crisis Looms Despite Cuts – pointed out that despite a $100 billion trimming across nearly every state to public-employee benefits, a $900 billion retirement funding gap remains. Michael Corkery reports:

Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions….

But the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, according to estimates prepared for The Wall Street Journal by researchers at Boston College…. While most states have approved some form of pension cuts, many have opted to apply those changes only to workers who have yet to be hired.

That means most of the savings won’t be realized for decades, when the most expensive retirement benefits come off the books. Changes made to the retirement plans of newly hired workers are expected to reduce pension costs by 25% over the next 35 years, according to Boston College estimates.

The story makes no mention of the muni bond market. Analyst Meredith Whitney – who just under two years ago infamously sparked a protracted muni selloff when she predicted a 2011 wave of defaults that didn’t happen – has since focused on the long-term threat that pension underfundings pose to municipal bonds. Still, the muni market soldiers on, with muni funds and ETFs having seen weekly inflows every week during 2012, even despite a trio of publicized defaults by California cities this year. Veteran muni-market observers continue to point out that most municipalities – whether by law, precedent, or fear of stigma – will cut employees and services to the bone before opting to default on a bond payment.

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There are 2 comments

SEPTEMBER 25, 2012 9:37 A.M.

eatingdogfood wrote:

RICO Conspiracy; The Unions and the Democrats!

SEPTEMBER 26, 2012 3:28 P.M.

Tough Love wrote:

Quoting ..." Veteran muni-market observers continue to point out that most municipalities – whether by law, precedent, or fear of stigma – will cut employees and services to the bone before opting to default on a bond payment."

It's too bad that the officials in those municipalities have as their #1 concern, getting re-elected, which means accepting Public Sector Union money in return for favorable votes on pay, pensions, and benefits.

What they SHOULD do is freeze the current (grossly excessive and unaffordable) Defined Benefit Plans (zero future growth) and replace them for FUTURE service with 401K-style DC Plans with a modest Taxpayer "match" ... of 3-4% which is typical for Private Sector Plans.